The European Union is creating a new payment mechanism to allow countries to legally trade with Iran amid US sanctions.

What exactly did the EU and Iran agree to?

Following a meeting with the foreign ministers of China, France, Germany, Russia, the UK and Iran, the EU’s foreign policy chief Federica Mogherini announced that new payment channels would be created to bypass US sanctions against Tehran ,euronews reported

“EU Member States will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue trade with Iran, in accordance with European Union law, and could be opened to other partners in the world,” she explained.

A joint statement said the six countries remained committed to the 2015 nuclear agreement and wanted to see “its full and effective implementation in good faith and in a constructive atmosphere". The "special purpose vehicle" aims to "assist and reassure economic operators pursuing legitimate business with Iran," it said.

How does it work?

In general terms, a special purpose vehicle is a subsidiary body that is protected from its parent company’s financial risk. The euro-dominated Iran mechanism will seek to avoid central and commercial banks who fear US penalties on their operations as a result of the sanctions.

This means that if a country wants to buy Iranian goods, it could wire money to the new entity, which would then deal with the transaction. Details on exactly how the Iran mechanism will work have not yet been revealed, with Mogherini promising that more “technical information” will be released in the coming days.

Why are there sanctions on Iran?

US President Donald Trump withdrew his country from the 2015 Iran nuclear accord earlier this year and re-imposed sanctions amid opposition from European leaders.

The accord was designed to stop Iran developing a nuclear bomb in return for the removal of sanctions that had crippled its economy. However, Trump said the deal failed to address Iran’s ballistic missile programme, its nuclear activities after 2025 or its role in conflicts in Yemen and Syria.

He said the economic sanctions were revived to undermine what he called “a horrible, one-sided deal that should have never, ever have been made”.

A second round of US sanctions is expected in November, aimed at putting a stranglehold on Iran’s oil exports, and Trump has warned that “more will follow”.

Could there be repercussions?

The new mechanism is likely to draw the ire of the US, with experts warning that those taking part in it could still be vulnerable to sanctions.

In his UN General Assembly speech on Tuesday, Trump called on “all nations to isolate Iran’s regime as long as its aggression continues.”

In August, the US president wrote on Twitter that “anyone doing business with Iran will NOT be doing business with the United States.”